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While Atlantic City was largely spared by Superstorm Sandy last month, its casino industry is getting battered by intensified regional competition from Pennsylvania and New York, with no relief in sight.

Casino revenues were down for a sixth straight year before Sandy hit, including a 20% drop in October. The storm, which shuttered the city's 12 hotel/casinos for nearly a week, could mean an especially tough winter in New Jersey's blighted gambling capital, where cold weather normally depresses traffic. Some are predicting casino revenue could fall more than 25% in coming months.

A night at the sleek Revel, Atlantic City's newest property, cost Barron's $129 before taxes. The hotel/casino, although inviting, has been losing money.
Tom Briglia/Getty Images

"The casinos in the Northeast that are closer to customers have been stealing customers from Atlantic City," says Keith Foley, a senior vice president in the corporate-rating group at Moody's Investors Service. "Hurricane Sandy compounded an existing problem. Atlantic City is getting hit from all sides."

Hurt by its downtrodden image, Atlantic City relies heavily on day trippers, including buses of elderly slots players, plus overnight guests lured by "comped," or free, hotel rooms and food. Unlike Las Vegas casinos, which get substantial room and food revenue, Atlantic City properties depend overwhelmingly on gambling winnings. The city has a convention center, but Foley wonders "what event planner will recommend a convention there."

A bad winter could worsen the already tough financial backdrop of many casinos and lead to the closure of one or two of weaker players, possibly including the small Atlantic Club, which unsuccessfully sought a buyer last year.

The city's newest property, Revel, a $2.3 billion Las Vegas-style destination resort, has underperformed financial expectations since it opened in April, and may be headed for a financial restructuring. Its $850 million of senior bank debt, issued just a year ago, trades for less than 60 cents on the dollar. In August Moody's warned it might downgrade Revel's credit rating from an already low junk rating of Caa1, noting that gambling revenue was running "significantly below the rate necessary for the company to cover its debt service and covenant obligations."

Revel's situation hasn't improved in recent months. October gambling revenue of $9 million was the third-lowest in the city, and less than a quarter of the casino win at chief rival Borgata, the most valuable property in the city, with a higher-end clientele.

Revel reported Wednesday that it lost $86.8 million in the third quarter—the seasonally strongest period for Atlantic City—and $221 million for the nine months. Even after stripping out one-time opening costs, the property lost $12 million in the quarter before interest expense. Revel said it is in "active discussions" with lenders for additional liquidity and "expects to close on such additional funding within approximately 45 days." The company might need funds, with unrestricted cash down to $12 million as of Sept. 30.

REVEL WAS CONCEIVED AS A destination resort that would bring badly needed convention business and an affluent, younger crowd to the city, but the project has been plagued by financial trouble. Morgan Stanley sank $1.2 billion into Revel and then wrote off almost its entire investment before selling the unfinished property in 2011 to a private investor group that raised another $1.1 billion to complete it.

Revel is a first-class property—and should be, given its price tag. The sleek 48-story hotel boasts 1,399 rooms, all with an ocean view; five swimming pools; high-end restaurants and shops; nightclubs; a spa; and a 5,500-seat arena where Beyoncé performed on Memorial Day weekend. The resort is smoke-free, in contrast to other casinos in town that allow smoking in designated areas. While Revel says customers like the no-smoking policy, it could be hurting traffic, as many gamblers smoke. The entire place seemed nearly deserted when Barron's visited recently.

Reflecting the city's difficulty attracting midweek travelers, a Barron's reporter paid just $129 for a Sunday night stay at Revel in a spiffy room with dark woods, black and white design, a comfy king-size bed, and a spacious bathroom with marble counters. A night at the Trump Taj Mahal or Tropicana would have cost just $50.

"Our business model is new to Atlantic City and we can't expect it to resonate with those who have known Atlantic City as purely a gaming destination over the past 30 years," Revel CEO Kevin DeSanctis wrote in an e-mail response to Barron's queries. "Revel has the potential to become the premier beachfront destination on the East Coast."

THE BIGGEST CHALLENGE TO Atlantic City is the 11 casinos in neighboring Pennsylvania, including four in the Philadelphia area. A year-old slots-oriented casino at New York's Aqueduct racetrack also is stealing traffic and has become the fastest-growing slots venue in the country, with more than $50 million in monthly winnings.

Atlantic City's leading casino, Borgata, produced $102 million of pretax cash flow in the first nine months of 2012, down 17% from the year-earlier period, and a $2.6 million loss after depreciation and interest expense. The largest operator in town,
Caesars Entertainmentczr 0.6172839506172839%Caesars Entertainment Corp.U.S.: NasdaqUSD8.15
0.050.6172839506172839%
/Date(1481301805855-0600)/
Volume (Delayed 15m)
:
185213
P/E Ratio
N/AMarket Cap
1190400335.29777
Dividend Yield
N/ARev. per Employee
136455More quote details and news »czrinYour ValueYour ChangeShort position
(ticker: CZR), owns four properties, whose cash flow has steadily declined in recent years. Moreover, Caesars has $22 billion of debt from a 2008 leveraged buyout. Its shares came public at $9 earlier this year, and now trade at $5.63.

The Bottom Line

Carl Icahn, who controls Tropicana Entertainment, could be the only investor making money in Atlantic City. Caesar's Entertainment and Trump Entertainment Resorts both are struggling.

Donald Trump's casinos have long been linked to Atlantic City, and they too are losing money this year, after adjusting for a one-time property-tax rebate. The Donald is no longer involved with Trump Entertainment Resorts after a 2010 bankruptcy reorganization, in which a bondholder group injected about $200 million of new equity. Trump equity now trades privately below $5 a share, down from an original $20.

Perhaps the city's only investor making money is Carl Icahn, whose
Tropicana Entertainment
(TPCA) owns the profitable Tropicana. Icahn also holds most of Trump's nearly $300 million of bank debt that pays 12%.

New Jersey Gov. Chris Christie has resisted allowing slots or other casino gambling elsewhere in the state, but might have to relent as gamblers take their business elsewhere. State tax revenue from gambling has been falling and totaled $236 million last year, a fraction of Pennsylvania's.

Moody's Foley says there is "no obvious" solution to the city's woes. Gamblers like to say the house ultimately wins, but that isn't likely in Atlantic City.

Betting Against the House

Winnings are down this year at Atlantic City's 12 casinos, and most are in the red after operating expenses and interest expense.